It is commonplace for broker/dealers and institutional investors (collectively “Traders”) to desire to trade large blocks of securities. This provides the ability to take advantage of market realities and hopefully maximize profits for their clients. Whether the Trader is acting for a buyer or seller, there is a strong desire to be able to trade anonymously so that his/her identity or trading intentions as a buyer or seller will not affect transaction pricing. Anonymity is also very important in the large block trading environment because there may not be a single entity with which to transact such large block trades and it may have to be split up among a number of buying or selling entities.
It has been known in a number of trading environments to periodically rebalance portfolio holdings to meet desired investing strategies. In many cases, this rebalancing would be based on weighting factors for the portfolio holding or in the case of a stock index, the proportional value of each stock with respect to the whole index. This periodic rebalancing of a portfolio can take place, for example, on a daily, weekly, monthly semiannual or annual basis.
Whenever there is rebalancing, there is always high execution risk in transitioning from desired old portfolio holdings to desired new portfolio holdings. This high execution risk dictates a desire to buy and sell the securities to effect such a transition within a relatively short time period. This execution risk may be in the form of price changes between the time the order is made and executed. Further, if the transaction is not executed in a relatively short period of time, there also can be considerable risk by the portfolio manager in the form of “legging risk,” which is that one of the “legs” in an investing strategy will not be filled. Therefore, it is highly preferred to reduce or eliminate these risks through simultaneous buys and sells for transitioning from desired old to new portfolio holding in the rebalancing process.
At present, there are two main forms of “portfolio rebalancing” also referred to as “portfolio balancing”. The first type is crossing systems that are deployed in periodic call auctions. Examples of a crossing systems are NYSE MatchPoint™ and NASDAQ Crossing Network™. The second type is algorithms operating in real-time throughout the trading day that effect portfolio balancing. These algorithms may be in the form of toolkits provided to broker/dealers for executing rebalancing strategies.
Strengths of crossing networks include (i) the seeming elimination of execution risk by pooling all orders into a single netting process; (ii) permitting optimal fills such that every trade that can be done, will be done within the call auction; (iii) and limiting market impact. Some weaknesses of crossing networks are they have (i) only limited market exposure by only accessing liquidity during the cross itself and (ii) limited location exposure such that there is no access to other liquidity sources during the cross. These weaknesses outweigh the strengths such that crossing systems do not provide a very attractive solution for portfolio balancing in the ATS environment.
Strengths of algorithms or “algos” include (i) exposure to broad market liquidity throughout the trading day and (ii) being dynamic, such that they can adjust their strategies depending in market conditions. Weaknesses of algos include (i) severe constraints on execution size, which means that they cannot exploit every market opportunity for fear of violating cash limits and/or risk limits and (ii) some market impact because certain transaction patterns may be visible. Again, the weaknesses outweigh the strengths such that algos also do not provide an attractive solution for portfolio balancing in the ATS environment.
The prior art systems and methods do not provide attractive methods for carrying out portfolio balancing in an ATS environment. The present invention overcomes the problems of the prior art systems as will be described subsequently.